A must for health care reform: End fee-for-service medicine

Doctors need incentives for good care, not more care.

ByAnthony L. SchlaffSeptember 10, 2009

Boston — President Obama is right on many of the big things on health reform. It is a moral imperative to provide universal access. We must solve the cost problem. And, yes, we can. In his rhetoric, however, the president is mixing up the fix for access with the fix for costs.

The reforms being debated in Congress are about insurance. They are attempts to fix the access problem. They do this through a variety of mechanisms, including requiring coverage for preexisting conditions, providing subsidies, creating mandates, and creating insurance pools.

These are all good, but none of them in any serious way begins to address the most critical driver of rising costs: a provider payment system built on a "the-more-you-do-the-more-you-get-paid" incentive system.

"Bending the cost curve" requires us to reform, not the way we are insured, but the way we pay providers. We may not yet know the best way to do this, but we know the fundamental thing that must be done: End fee-for-service medicine.

Providers must be paid in a way that rewards good care, not more care. The most straightforward way to do this is to pay providers with a salary, allowing bonuses based on quality measures, but not on incentives to do more or to do less.

The confusion between insurance reform and payment reform, and their effects on access versus costs, reflect a persistent and dangerous lack of clarity about the desired roles of government and of market competition in healthcare.

The insurance system that pays for care and the delivery system that gives the care are fundamentally different, and confusing them confuses policy. Medicare (and proposed public plans) are not government-run healthcare. They are forms of government-run insurance. The delivery system is private.

When policymakers call for the need for competition in the insurance market as a way to hold down costs and increase innovation, they are caught in the same confusion. Promote competition among providers, by all means, but multiple insurance companies do nothing to affect provider competition, and it is among providers that we need to lower costs and might wish to increase innovation.

Is there really any benefit to competition among insurers? Hardly. We don't need innovation as to who gets covered. We want everyone covered! Nor do we need it regarding the basic coverage package, which we need to standardize.

Furthermore, the notion that competition for price on insurance can hold down costs of care ignores a basic law of economics: Price competition is effective when the competition is applied at the time and place where the decisions get made.

When each of us chooses our insurance (or when our employer does it for us), we know little about the decisions to be made over the next year. A $50,000 bypass operation is less than worthless to me now. I'd even pay to avoid it. But six months from now, if I have a massive heart attack, overnight it may become priceless to me.

It's often stated that rising costs result from the public's overconsumption of health treatments. When insurance pays for care, patients want to run every test and take every pill.

This belief leads some reformers to push for measures – such as high deductibles and copayments, or plans that cover only catastrophic care – that would force consumers to bear more of the burden of health costs.

But when it comes to big decisions about care, doctors, more so than patients, tend to call the shots. No matter how your health plan is designed to affect your decisionmaking, it is the healthcare providers who decide what treatment you need. And the more they do, the more they are paid.

How incentives distort care

There is no consequence to and little effort required of providers if they order extra and unnecessary tests – even harmful ones. But to do only what is necessary requires the use of valuable time and effort: to think through each decision carefully, to reassure the patient, to read the latest literature, and to spend extra time documenting decisions so as to decrease malpractice risk.

Therefore, as providers make decisions to use resources, the pressures on them to maximize their income and to use as little time as possible push them to do more, even if the care is unnecessary or of vanishingly low value.

Only by changing these pressures – by reforming payment systems and not just insurance – can we hope to control costs.

Yet this crucial aspect of reform – pay for providers – is not a serious part of today's discussion in Congress.

Historically, insurance companies have not done well at controlling costs. When they had their chance in the 1990s, they did it with payment discounting and by seeking healthier patients, but they did not seek to change the way they paid providers and thus did little to decrease unnecessary care or increase the value of the care given. They managed prices, not cost, and certainly not care.

We will need government intervention to require payment structures that promote quality, not just quantity.

Tackle access before costs

As was the case in Massachusetts, the nation may need to tackle access before it can take on costs. It may be politically unfeasible to propose even rational mechanisms to restrain use of care when we do not yet have structures to guarantee basic care to so many.

Until government has a framework for making sure there is a functioning insurance system, it will not have the leverage over that system to demand the payment reforms needed to control cost. So be it. We can live with fixing access now and costs soon – but let's make sure we are clear and honest about what we are and are not doing – so we know what to expect and what work remains.